Yahoo Finance Canadians shouldn't wait to take action on looming mortgage renewals: experts
One-third of mortgage holders have already seen payments rise compared to February 2022
Experts say Canadians bracing for higher payments when they renew their mortgages in 2025 and beyond should start planning now in order to best manage the increase.
"There is definitely a concern about affordability of mortgage payments among Canadians, without question," Cailey Heaps, CEO and broker with Heaps Estrin Real Estate Team, said in an interview with Yahoo Finance Canada.
"People are already feeling the pinch, and shouldn't assume it's going to get better in the next year or so… Some people have an optimistic view on where rates may go, but we're not expecting them to go back to where they once were. Don't string it out until it's too late."
According to the Bank of Canada, one-third of mortgage holders have already seen payments increase compared to February 2022, before the central bank started hiking its interest rate. The Bank says by 2026, nearly all mortgages will have seen payments increase.
The Bank of Canada has rapidly hiked its benchmark rate since February 2022, bringing it to 4.5 per cent. The central bank is scheduled to issue its next interest rate decision on June 7. While economists do not expect the Bank to raise rates, recent economic data have increased the odds of another hike this year.
"Assuming mortgage rates evolve according to current market expectations, the median payment increase over the 2023-2026 period will be about 20 per cent," the central bank said in its Financial System Review report released in May.
"While increases in mortgage payments should be manageable for most households, the impact will be more significant for some."
Those that will face a more significant impact are homeowners with variable rate mortgages. Some variable-rate borrowers who are renewing for the first time since signing onto low rates years ago will have to either hike payments or come up with a lump sum if they want to pay their home off in the same timeframe. That's because for some, current payments are only covering the interest on the mortgage, leaving the principal untouched. A Desjardins report says that for some variable-rate borrowers, that lump sum could be as much as $160,000.
Rob Butler, a mortgage broker with Butler Mortgage, says in an interview that he frequently gets calls from clients on variable-rate mortgages who have seen rates increase in the span of a year from around 1.45 per cent to above 6 per cent.
"They call us constantly looking for ways to find a method to get their payments down," Butler said. In some cases, Butler says interest has grown to be bigger than the monthly payments, which means those people have to be "ultra focused" on addressing the problem.
"We tell people the same thing: if it's humanly possible, you need to find a way to increase your payment now to prevent the growth of the mortgage. We tell everybody the same thing."
Fixed-rate borrowers are also not immune to the impacts of higher interest rates, and will also face higher monthly interest payments as a result of rising rates. The Bank of Canada says the average increase in payments at renewal for fixed-rate mortgages will be the greatest in 2025 and 2026, at between 20 per cent and 25 per cent.
"If they have fixed rates, they should simply consider the fact that they will need to pay more and they will need to earn more in order to maintain the same lifestyle they do now. They may want to save some money for this eventuality in two or three years," Butler said.
"But people with variable mortgages have the most exposure to the biggest increases, it's as simple as that… they probably need to deal with it by increasing their payments now."
Refinancing and extending amortizations
For borrowers who are concerned about monthly payment increases, Heaps recommends homeowners to reach out to their bank to come up with a solution to help manage payments.
"Proactively go and meet with the bank and come up with a solution that works for you," she said. While it depends on an individual's financial scenario, Heaps says her overarching advice has been to sign onto a two or three-year term, which will allow borrowers to renegotiate after a few years.
"If people are running into an issue of being able to pay their mortgage on a monthly basis, all of the big banks are working with their clients to sort out payment terms that are manageable because no one wants to get into an environment of a huge increase in arrears," she said.
What that will likely mean for many is renegotiating their mortgage terms and applying to extend their amortization. Some homeowners who were initially signed onto a 25-year amortization are extending it to 30 years to make the payments more manageable. Bank of Canada Governor Tiff Macklem noted in a speech in May that lenders and regulators are taking steps to provide borrowers with options to manage higher payments, including extending amortizations.
Another option for people facing higher interest payments is to sell their home, but Mortgages of Canada CEO and broker Samantha Brookes says few are choosing this option. Brookes says she has seen more clients opt to invest in basement rental suites as a way to offset high mortgage payments and help with affordability.
"You can understand where they are coming from. Where are you going to go with these high prices?" she said in an interview.
"People are hanging on to their homes for dear life."
Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.
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